New report predicts Canadian home prices could drop by 30% — or more

Canadian home prices still have further to fall this year as the real estate market takes a nosedive in the wake of the pandemic.

The national home price decline is only halfway through its total drop - already down 14 per cent since the February 2022 peak - and will drop another 16 per cent by the middle of 2023, according to a recent report from Oxford Economics.

When home prices bottom out prices will have dropped 30 per cent in total - and in the worst case scenario prices could see a 48 per cent decline.

We see a moderate downturn being possible, with defaults and insolvencies rising a little, but not drastically," said Tony Stillo, director of Canada Economics at Oxford Economics.

There are various scenarios which dictate how the housing market will fare in 2023. If global supply chains improve and inflation eases, home prices could fall by 27 per cent from the peak to the bottom, which is the best case scenario, the report said.

A strong labour market could also accelerate a faster economic recovery and restore investor confidence into the market, Stillo added.

We have seen a downturn in real estate with construction and consumers pulling back, but if we continue with this job growth that will temper the (housing) decline," he said.

In the worst-case scenario, if there's a recession and a surge in defaults and insolvencies, the housing price could fall as much at 48 per cent.

This is quite severe and highly unlikely," Stillo said, which is why he's forecasted the total price decline will be closer to 30 per cent.

While job numbers are looking positive, the housing sector is leading the economy into a recession, he added.

The Bank of Canada's interest rate hikes over the past year were used to temper inflation and the unsustainable 50 per cent home price gain made over the first two years of the pandemic.

Raising interest rates was one of the main ways to bring down home prices because the housing sector is rate sensitive," Stillo said. The rapid increasing of interest rates and souring of buyer sentiment caused the housing market to tip and start to correct."

The real estate market accounts for a staggering 14 per cent of Canada's economic growth. If it falters there is a sizable impact on the broader economy. The Bank of Canada noted that the impact on homeowners weighed on its decision to pause further hikes.

Residential investment shrunk by 13 per cent since March 2022, and will fall another 19 per cent by the third quarter of 2023, the Oxford Economics report said.

Price declines will vary at a local level with Toronto trailing behind the national average just shy of 30 per cent. Hamilton is seen dropping a whopping 34 per cent and Kitchener-Cambridge-Waterloo by 33.6 per cent. Those regions saw some of the quickest price gains, which is why they're having the hardest falls, he said. A 30 per cent drop is considered by some economists to be a housing crash.

But other economists predict more moderate price declines. Nationally, RBC's forecast is a 14 per cent decline from the peak.

Toronto is inching closer to the finish line with prices predicted to bottom out by late spring or midsummer, said Robert Hogue, senior economist, Royal Bank of Canada.

We think the price correction has a little longer to run," he said in a recent report.

Home prices have dropped for 11 consecutive months but have so far reversed less than a third of their 57 per cent price gain in the first two years of the pandemic, he said.

Once the bottom is reached the next big question is what happens after?" he said. We predict it will remain flat for a period of time and don't think it will bounce back right away."

By the middle of the year, Hogue says the market will have adjusted to a higher interest rate environment.

Even with the drastic fall in prices, Toronto's home prices are likely to remain above pre-pandemic levels.

Prices won't be below pre-pandemic levels, due to strong immigration and limited supply," Stillo said. This correction seems massive in a normal time, but if you do it on the back of a 50 per cent rise during the pandemic it's a necessary correction to restore a more balanced valuation of the market."

Clarrie Feinstein is a Toronto-based business reporter for the Star. Reach Clarrie via email: clarriefeinstein@torstar.ca